'Truth spoken without moderation reverses itself'
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Sunday, December 11, 2016

Remember the old
adage, ‘You can fool all the people some of the time, and some of the people
all the time, but you cannot fool all the people all the time?’
Narendra Modi’s government is reluctantly learning its truth now. Exactly a
month after the sudden announcement of the demonetisation of Rs 500 and Rs 1000
notes, even the tame audio-visual media has, almost unanimously, turned against
his government on this issue. Their consensus echoes an epitaph favoured by
Bismarck, “ it was not a crime; it was a mistake”.

The mistake is so
elementary that it leaves no room for doubt that Modi announced the
demonetisation without consulting either the Reserve Bank of India or the economists
in the finance ministry and NITI Aayog. One of the most basic equations in
economic theory – MV=PT – seems to have been forgotten. It is the base of the
quantity theory of money upon which the whole neoliberal macroeconomics of
today rests.

In layman terms, the
equation states that the money supply in an economy (M) multiplied by the
number of times it changes hands in a year (V) equals the average price level
(P) multiplied by the number of transactions (T) that take place during the
year. PT is the gross revenue generated in the economy during the year. Take
away double counting – the resale of intermediate goods from one producer to
the next – and you arrive at the GDP of the country. Neo-classical
economists use it to show that if you double the money supply, prices will
simply have to double in the long term. But implicit in this is the belief that
the velocity of circulation of money is very stable as it reflects the
culturally determined habits of saving and consumption, and will therefore remain
unchanged. The volume of transactions in any given period is, therefore,
constant.

This assumption does
not, in fact, hold true all the time. In his book General Theory of
Employment, Interest and Money, J.M. Keynes showed that in actual fact, V
rises or falls depending on the optimism or pessimism about the future course
of the economy. Thus prices can, in fact, increase ­– and output can respond –
without an increase in money supply, and fall without a reduction in it. This
is the basis of Keynes’ theory of the trade cycle, one of the two that together
fully explain this endemic seesaw in a market economy.

But Keynes never
envisaged the possibility that a government would, of its own volition, bring
the circulation of money to a near halt and force V down close to zero. For,
since anything multiplied by zero is zero, it would, therefore kill the market
economy and drive it back to barter. That is precisely what the demonetisation
is doing. For an already tottering economy, this is a disaster. For the political
future of the BJP, it is a self-inflicted goal that may well cost it the match.

I got some idea of how
much V had fallen after demonetisation when a sweet shop owner told me that on
the day after demonetization, his sale had fallen from Rs 30,000-40,000 per day
to a mere Rs 700. A bookshop owner in Connaught Place told a friend that his
sales had fallen from Rs 20,000-30,000 a day to Rs 12,000 in the past month. A
high-end optician in Khan Market, New Delhi told me that his sales had fallen
by 25% in the past month. Automobile sales, which had been rising at 11% a year
in the first half of the year, fell by 38% for Mahindra & Mahindra, 28% for
Tata Motors, 20% for Hyundai and 22% for Renault in November. There is not a
single retailer who does not have a similar story to tell.

If this is the
condition of demand in the urban areas, where more people have bank accounts
and use credit cards, it is not hard to imagine what the situation is in rural
areas where where moneylenders still meet four-fifths of the demand for
credit, and nearly all the transactions are done in cash. Two-wheeler sales have fallen by 35-40%
because 65% of all the sales are done in cash and tractor purchases have fallen
by a whopping 63% because only farmers and a few construction companies buy
them. The worst affected
sector is construction. After being starved for funds for nine years, the
construction industry has been pushed further down by demonetisation. The
immediate impact has been on employment, for not only is it India’s second
largest employer – providing jobs to 45 million people – but since employment
in agriculture stopped growing a decade and a half ago, it has also been the
principal creator of new jobs.

But the bulk of its
workers are migrants from other states who are paid by the day, or at best by
the week, and they ask for their wages in cash. Therefore, in order to pay
them, their employers need to maintain large daily stocks of cash. Those were
the cash reserves that Modi made worthless overnight. What is worse, even their
current overdraft facilities, and their bank deposits, are not available to
them because the government has put a Rs 24,000 a day limit on all withdrawals.

Unsurprisingly,
anecdotal evidence suggests that the industry has virtually ground to a halt.
The employers’ shortage of cash has translated into a shortage of jobs and
stalled construction. Earnings by have fallen by 80-90%. Until November 8, for
instance, the mazdoor naka near the Madhuban garden in Bhandup
in Mumbai was among the largest in the city, with nearly 500 construction
workers thronging it every morning. On November 30, there was just a
trickle of 30 workerswaiting hopefully for jobs there.

In desperation, more
and more workers are accepting payment in the old currency notes, and sending a
member of their family to queue in front of banks all day to exchange it for
legal tender. But as the employment opportunities have continued to dwindle, an
increased number have joined a return flow of migrants to their villages in
order wait until the times get better. Bus companies that brought migrant
workers from Orissa to Gujarat are now plying in the opposite direction. There
is a similar return of migrant workers to Andhra and Telangana from Mumbai and
other cities in Maharashtra, and now, increasingly, from Delhi, Uttar Pradesh,
Bihar and Rajasthan.

Construction is not
the only sector in which jobs have disappeared. A fortnight after
demonetisation, the Engineering and Export Promotion Council estimated that
more than 400,000 workers had been laid off in the textiles and garments
industries and as many as 60,000 in the leather industry. These are only a few
lightning flashes illuminating the storm that is enveloping India’s poor.

Demonetisation is also
laying waste to small and medium-sized producers and artisans in the country.
It has not even spared the service industries, for except in software and
domestic service, income and employment in every other service industry is
directly related to production in the primary and secondary sectors of the
economy… read more: